FE-1 Company Law common mistakes
FE-1 Company Law · Understand the traps and how to avoid them.
Treating the company as a separate legal person only when it helps the client, then arguing shareholders own company property or are liable for company debts whenever that produces the desired outcome.
Candidates learn Salomon v Salomon as a slogan ('separate legal personality') but never internalise its consequences for property, contracts, and liability, so they flip between entity and aggregate theories under exam pressure.
What to do instead
Before answering any question, write down the three consequences of separate personality (company owns its property, contracts with the company bind only the company, members have limited liability subject to statute) and test each option against all three. Flag any option that pierces the veil without a recognised ground as wrong unless the facts show fraud, sham, or a statutory provision expressly imposing liability.
Piercing the corporate veil on vague 'justice' or 'fairness' grounds, or treating parent-subsidiary groups as a single economic unit for liability purposes.
Candidates over-extend older cases and general equitable language, and they conflate commercial expectation with legal doctrine; the modern restrictive approach is easy to miss if study is based on case summaries only.
What to do instead
Memorise that veil-piercing is exceptional and generally requires impropriety exploiting the corporate form (evasion of existing obligations, concealment, or a sham). Distinguish it from directors' personal liability for breach of duty, wrongful trading, and statutory personal liability, which are separate routes. Practise classifying fact patterns into 'veil-piercing proper' versus 'director or statutory liability' and never use group unity as a standalone ground.
Confusing the roles and powers of directors, shareholders in general meeting, and the board, and assuming shareholders can always instruct directors on management decisions.
Candidates blur ownership and control, and they do not separate the default allocation of powers in the model articles from powers exercisable only by special resolution or under statute.
What to do instead
Build a two-column table: matters for the board (management, business decisions, most appointments and contracts) versus matters reserved to members (constitutional amendments, certain transactions, removal of directors, capital changes). For each question, identify who is acting and ask whether the constitution or statute gives that organ the power. Remember directors owe duties to the company, not to instructing shareholders.
Applying the wrong voting threshold or majority: using a simple majority where a special resolution (75%) is required, or counting votes by shareholder number rather than by shares.
Thresholds are scattered across the constitution, statute, and model articles, and candidates memorise lists without anchoring each item to its threshold.
What to do instead
Create a threshold map: ordinary resolution (simple majority of votes cast) versus special resolution (75% of votes cast) versus written resolution rules and class rights. Attach at least three concrete examples to each threshold (for example, removing a director, amending articles, approving certain capital reductions). In every question, state the required threshold before evaluating the facts, and count votes by shares where the company has share capital.
Misapplying directors' duties: treating the duty to act in good faith as an objective test of commercial reasonableness, or forgetting to consider the interests of creditors when the company is insolvent or near insolvency.
Candidates learn duty names without the standards attached, and the creditor-interest shift is a subtle doctrinal point easily lost among the seven statutory duties.
What to do instead
For each duty, memorise its standard: subjective good faith (honest belief) versus objective care and skill (reasonably diligent person with that person's knowledge and experience), plus the requirement to exercise powers for proper purposes and to avoid conflicts. Add a standing checklist item: if the company is insolvent or bordering on insolvency, the interests of creditors must be weighed. Apply the checklist to every director-conduct question before reading the options.
Missing conflicts of interest and self-dealing: failing to spot that a director's transaction, loan, or opportunity requires disclosure, board authorisation, or member approval.
Candidates focus on the headline transaction and ignore the director's personal interest, or they assume disclosure to one director is sufficient.
What to do instead
Scan every fact pattern for a director on both sides of a transaction, a corporate opportunity taken personally, or a benefit received. Then ask three questions: was the interest disclosed to the board, was it authorised under the constitution or by members, and was the director excluded from voting or counting in the quorum where required? Treat undisclosed conflicts as a breach unless an authorisation route is clearly satisfied.
Confusing share issuance with share transfer: assuming new shares can be issued freely or that existing shareholders have automatic pre-emption on a transfer, or ignoring that a transfer of existing shares does not raise new capital.
Both involve shares and members' approval, so the mechanics merge in candidates' minds; pre-emption rights on allotment are also easily confused with restrictions on transfer in the articles.
What to do instead
Draw a clear distinction: allotment (issue of new shares, requires board power and usually member authorisation, with statutory pre-emption rights unless disapplied) versus transfer (sale of existing shares, governed by the articles, often with board refusal rights and no new capital). For each question, first classify the event as allotment or transfer, then apply the correct approval and pre-emption rules.
Getting distributions wrong: paying dividends out of capital or unrealised revaluation gains, or ignoring the profits-available test and the consequences of an unlawful distribution for directors and recipients.
Candidates remember 'dividends come from profits' but not the detailed rules on distributable profits, and they overlook that an unlawful distribution is recoverable and can trigger director liability.
What to do instead
Memorise the core rule: distributions may only be made out of profits available for the purpose, with reference to accumulated realised profits less accumulated realised losses, and never out of capital. Then note the consequences: recipients may have to repay, and directors who authorised the distribution can be personally liable. In questions, compute or assess available profits before approving any dividend option.
Ignoring the constitution and default articles: answering from general principle when the company's articles or a shareholders' agreement modifies or displaces the default rule.
Candidates treat the model articles as background rather than as operative rules, and they skip the instruction in the facts that the articles have been amended.
What to do instead
Adopt a fixed reading order: statute first, then the company's constitution as stated in the facts, then default model articles only where silent. Highlight any phrase such as 'the articles provide otherwise' or 'by unanimous written agreement' and treat it as controlling. When an option conflicts with a stated article provision, eliminate it even if it reflects the general default rule.
Managing time and question technique poorly: spending disproportionate time on one long fact pattern, leaving no time for later questions, and changing correct first answers without a doctrinal reason.
Company law questions often present dense fact patterns with several distractors, which invites over-analysis; candidates also underestimate the number of questions and do not practise under timed conditions.
What to do instead
Use a two-pass strategy: answer clear questions first, flag long scenarios, and return to them with remaining time. For each flagged question, identify the single legal issue, recall the governing rule, and eliminate options that misstate the rule rather than reasoning from intuition. Only change an answer when you can name the specific rule that makes the first choice wrong. Practise full timed sets to calibrate pace.